If I had a dollar for every time someone asked me if I'm invested in or can give my take on Bitcoin or any other Cryptocurrency, I'd probably have enough money to buy myself two bitcoin... wait... just one... the price just dropped... wait no... fuck, make it three... you get what I mean...
What are Cryptocurrencies?
Think of them as digital cash in a digital wallet, like Square's cash app, PayPal or PayPal's app Venmo, but a currency that isn't tangible, where folks are able to purchase goods or services through a peer-to-peer cash system. You know, just how fiat currency works. But, this is where cryptos get interesting. Your transactions and balance of the currency are recorded or use blockchain technology and is seen amongst others who use the currency in order to avoid a single institution to keep track of others transactions and balances. Meaning that there isn't one person or institution who writes EVERYONE'S transactions and current balance like your bank, but rather, everyone using the currency can see everyone else's transactions and balances, of course in anonymity. With that said, the currency is decentralized, meaning that there is no central bank that controls or manipulates the circulation or value of the currency.
It's a promising currency but...
I have my fingers crossed that cryptos prosper in the future, it seems to have a promising future, the majority of investors are the younger end of the Millennial spectrum/Gen Z if Bitcoin or any other Crypto falls drastically and completely ruins the perspective of investing to the younger crowd, it could turn them off from investing in the stock market completely, which is absolutely devastating. Furthermore, these newer investors haven't experienced a recession or an economic downturn, they don't know how to, both psychologically and physically, handle a downturn. (I say this as if I've experienced the great depression, but make no mistake, I know hardship... I'm a Chipotle shareholder as of January 3rd, 2017) Cryptos can potentially be "the internet's currency" without the long wait time to receive your cash like other peer-to-peer cash systems, especially if you convert your government currency into another currency from a different country. The purchases of goods and services will only boost in an international economy. So why am I skeptical?
Some fundamentals I have
Any asset class or industry that goes up 1000% in a single year and has gone up ~5000% over the last three years is VERY alarming to me. If my coworker, friend, stranger, or family member approaches me and mentions that they're invested in Cryptos or talks about investing in them and don't exactly comprehend what Cryptos are, what blockchain is, or where the hell they placed their money, it's alarming to me. Especially if it's their first time investing in the markets. If folks are saying "damn... I should have invested back when it was at $100" but still invest in the asset class at a WAY higher price due to FOMO, it's alarming to me. If people are placing their whole life savings on Bitcoin, it's alarming to me. IF PEOPLE ARE PULLING OUT PERSONAL LOANS JUST FOR LEVERAGE AND TO AFFORD THE ASSET CLASS AND THINK THEY CAN MAKE SOME QUICK CASH ON THE ASSET THAN I SURE AS HELL AM ALARMED.
My MAIN and non-jokingly fundamental
I only invest in assets that have cash flow and that grow over time. Meaning that I can invest in a business that makes revenues around $1 billion a year today, hoping that in 10 years, its making $5 - $10 billion in revenues every year, with its stock price going up as well. A positive ROI in my initial investment. Even if the stock price is flat, I would still receive a quarterly dividend. Whereas in currency, there is no cash flow, no dividends, and I have to find someone that is willing to pay more to get positive ROI on my investment. Meaning that if I bought a Crypto at $100... I need to find someone who is willing to give me something greater than $100.
A blast to the past
Allow me to mention a moment in market history, where there was similar hype and valuation behind an industry, exactly like Cryptos, that frightened a lot of investors when it crashed.
The beginning of the dot-com bubble
It's early 2000, young Jeff Bezos is only worth $10 billion, Amazon has a market capitalization of $30 billion. None of that was important, I just wanted to share that cause I think it's cool as shit. BUT WHAT IS IMPORTANT is that the NASDAQ was hitting an all time high, as were the other indices, but outpaced its index counterparts, the Dow and S&P, by LARGE margins. The reason behind it? The internet. It became a large sensation across the nation, numerous businesses decided to create e-commerce sites, a few were fortunate enough to get listed on the NASDAQ. All the new and cool and hipster and young investors knew that there was cash to be found on the internet, and lots of it, thus, investing in numerous internet related companies. Everyone made ridiculous gains those following 3 years. On January 1998 the NASDAQ was at 1,698 points, come February 2000 the NASDAQ was at 4,696 points. The NASDAQ went up over 203%.
In those 2 years, novice investors made greater returns than Warren Buffett, analysts were critiquing Buffett by mentioning that he lost his touch and he doesn't comprehend this new "internet economy." Eerily similar to how some younger folks have made a lot of money in Cryptos and are discrediting many older investors on being arrogant on this new and hot currency.
Shit hits the fan
Suddenly, we were slapped with a mild recession. It marks the beginning of the lost decade for the U.S. Numerous sources point out to different things as to what cause the recession - much how I blame different people from my past to justify my crappy actions/decisions I make now. - From June 1999 - May 2000 the federal reserve raised their interest rates 6 times in order to adjust for high inflation and the fast paced stock market that was booming. The fast increased rate slowed down the economy, loaning of cash, and let unemployment rise.
Some say it was due to the numerous accounting scandals from publicly traded companies during 2000 - 2003. Companies such as Xerox, Freddie Mac, Healthsouth, Tyco, Worldcom. Forcing shareholders to question their trust on publicly traded companies. My favorite of all is possibly Enron... there motto is "Ask why" as in "ask why the fuck our shareholders were lied to?" My second favorite is Arthur Andersen, an accounting company behind the Enron audit, they should have known better.
The attack on 9/11 only made matters worse, as soon as the exchange reopened again, a quick and painful sell off emerged.
It was clear that the U.S had a recipe for disaster
Is the NASDAQ okay?
Hell no the NASDAQ wasn't okay, with the U.S. practically going to shit, the listed internet companies, who keep in mind had ridiculous valuations and market capitalizations as close to other corporate giants at the time, and had little to NO profits at all, fell to the ground. The NASDAQ fell 78% in the following 30 months. These startups forced to fire their employees at very rapid numbers or filed for bankruptcy. Only 48% of those listed companies made it to 2004. Not entirely sure which companies are still around today aside from Amazon, Apple, and Microsoft, but anyway. All the young bucks who had faith in the NASDAQ, who pushed it to its all time highs, who pursued the hot stocks, the sensation, the new way of business through the internet, got wiped out, those who sold in March were fortunate to evade the 78% fall and those who purchased at the top in March greatly hated the market.
What happened to Buffett?
As for Buffett and any long-term investors who foresaw the drop of the NASDAQ and knew better not to chase a trend and to stick to their fundamentals. He (they) performed well come 2001, 2002, and 2003 achieving a loss of 6.1% (the S&P lost 11.9% to give you some perspective), gain of 10% and 21% respectively. It took the NASDAQ 1 whole decade and 4 years to reach it's all time high from 2000. Munger and Buffett both fist bumped each other and smirked while saying "we're still the shit and no one can say anything else otherwise."
The NASDAQ went up only 208% in two years, Bitcoin has gone up 5000% in three. They both shot up due to the hype and excitement behind it that swept a nation, bringing in novice investors wanting to make a quick buck, that have little experience in the stock market. Much of the folks who made millions in cryptos will win the short-term sprint, but will lose the long-term marathon if they believe that cryptos will continue to go up.
The way to creating long-term wealth is in the waiting... not by placing your cash into a trend and speculation
Too many folks believe they have it all figured out by investing in Bitcoin, arrogantly yelling at the folks who have been investing for decades that they are wrong and simply don't understand cryptocurrencies. Heed my warning crypto traders, the currency is no doubt the future, you are getting phenomenal returns now, but it is certainly not worth what it is now.